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Assume that Martinas requires a 12% rate of return Compute net present value in favor of for against keeping the property using the total- cost approach (Round discount factor(s) to 3 decimal places and other intermediate calculations to the nearest dollar amount.) Net present value

Assume that Martinas requires a 12% rate of return Compute net present value in favor of for against keeping the property using the total- cost approach (Round discount factor(s) to 3 decimal places and other intermediate calculations to the nearest dollar amount.) Net present value

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Raul Martinas, a professor of languages at Eastern University, owns a small office building adjacent to the university campus. He acquired the property 10 years ago at a total cost of $608,500-that is, $78,500 for the land and $530,000 for the building. He has just received an offer from a realty company that wants to purchase the property: however, the property has been a good source of income over the years, and so Martinas is unsure whether he should keep it or sell it. His alternatives are as follows: a Keep the property. Martinas's accountant has kept careful records of the income realized from the property over the past 10 years. These records indicate the following annual revenues and expenses: Martinas makes a $13,250 mortgage payment each year on the property The mortgage will be paid off in eight more years. He has been depredating the building by the straight-line method, assuming a salvage value of $79,500 for the building, which he still thinks is an appropriate figure. He feels sure that the building can be rented for another 15 years. He also feels sure that 15 years from now the land will be worth three times what he paid for it. Rental receipts Less: Cuilding expenses: Utilities Depreciation of building Property taxes and insurance Repairs and maintenance custodial help and supplies Net operating income $26,408 18,029 21,908 12,500 63,258 b. Sell the property. A realty company has offered to purchase the property by paying $221.000 Immediately and $29,000 per year for the next 15 years. Control of the property would go to the realty company immediately. To sell the property. Martinas would need to pay the mongage off which could be done by making a lump-sum payment of $122.000 Net present value $ 172,800 Click here to view Exhibli 10-1 and Exib 10-2, 10 determine the appropriate discount factor (S) using Tables 141,870 $ 30,130 Required: Assume that Martinas requires a 12% rate of return Compute net present value in favor of for agains!) keeping the property using the total- cost approach (Round discount factoris) to 3 decimal places and other intermediate calculations to the nearest dollar amount. Would you recommend that he keep or sell the property? Keep the property Sell the properly
Transcribed Image Text:Raul Martinas, a professor of languages at Eastern University, owns a small office building adjacent to the university campus. He acquired the property 10 years ago at a total cost of $608,500-that is, $78,500 for the land and $530,000 for the building. He has just received an offer from a realty company that wants to purchase the property: however, the property has been a good source of income over the years, and so Martinas is unsure whether he should keep it or sell it. His alternatives are as follows: a Keep the property. Martinas's accountant has kept careful records of the income realized from the property over the past 10 years. These records indicate the following annual revenues and expenses: Martinas makes a $13,250 mortgage payment each year on the property The mortgage will be paid off in eight more years. He has been depredating the building by the straight-line method, assuming a salvage value of $79,500 for the building, which he still thinks is an appropriate figure. He feels sure that the building can be rented for another 15 years. He also feels sure that 15 years from now the land will be worth three times what he paid for it. Rental receipts Less: Cuilding expenses: Utilities Depreciation of building Property taxes and insurance Repairs and maintenance custodial help and supplies Net operating income $26,408 18,029 21,908 12,500 63,258 b. Sell the property. A realty company has offered to purchase the property by paying $221.000 Immediately and $29,000 per year for the next 15 years. Control of the property would go to the realty company immediately. To sell the property. Martinas would need to pay the mongage off which could be done by making a lump-sum payment of $122.000 Net present value $ 172,800 Click here to view Exhibli 10-1 and Exib 10-2, 10 determine the appropriate discount factor (S) using Tables 141,870 $ 30,130 Required: Assume that Martinas requires a 12% rate of return Compute net present value in favor of for agains!) keeping the property using the total- cost approach (Round discount factoris) to 3 decimal places and other intermediate calculations to the nearest dollar amount. Would you recommend that he keep or sell the property? Keep the property Sell the properly
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